benefits of negative gearing

my view on the benefits of negative gearing
it's worked for me, i now have several i.p.'s


personal income 40,000 taxable
8,980 tax

31,020 net to live on

with a i.p. costing 160,000 ( in my area ) with you own home fully paid / partly paid off and using both to borrow the whole amount.

i.p. rent @ 180 / week = 9,360 +
rates 1,100 -
insurance 550 -
maintenance 200 -

balance 7,510 +

interest only loan fixed for 5 years from ( anz 6.7%, cba 6.69%,
nab 6.59%, wbc 6.69% ) + $ 8 / month a/c fees
= 10,800 -
so new gross 47,510 +

= 36,710 +
capital allowance 2,850 - non cash expense
depreciation 900 - non cash expense

new taxable income 32,860 +

new tax payable 6,238 -

new net calculation 36,710 - 6,238 = 30,472

new net to live on 30,472


G'day Ruk,

Try doing those figures to Sydney or Melbournes negitive gearing
properties, you'll crash big time.
Huge monies are needed to purchase properties here. The rents go anywhere near covering the costs.
Shame really I would love to buy Sydney property for bush prices.

Bruce G.
Winners make it happen.
Losers let it happen.
Hi Ruk & Bruce

Ruk has purchased a property at a modest price of $160,000 yielding more than 5.5% pa on a 50 week year, is modestly negatively geared and is costing him $548 a year. I call that a good deal. Well done.

It only requires a Capital Gain of 7.5% pa compounding and the value of the investment doubles in ten years. Way ahead of the yearly contribution. From past history of the last 100 years, this is a realistic expectation and I don't believe that it is wrong to expect a modest gain. I know that there are a number of exponents strongly pushing the anti negative gearing story but without a cash input after tax or value adding to the investment, a positive cash flow is a dream.

Yes it won't work in Sydney now. But surely one major point to consider in investing is where to invest . Sydney is yielding around 4%, Melbourne even less and it looks like it will stay that way for a year or two. The gurus are also suggesting a plateau effect for the Sydney / Melbourne markets for a year or two for Capital Gain so why bother unless you stub your toe on a bargain.

So what do you do? Invest elsewhere. You don't have to be tied to Sydney or Melbourne or anywhere necessarily if the figures won't stack up for you and your strategy.

And it is even more difficult to invest in these places with a positive cash flow than with a negative cash flow. OK so many of you will be jumping up and down and saying that you can buy at wholesale, or below real prices or you are a great negotiator and that is great but it is not a realistic argument.

If the bush is your choice, usually with high yields, low cap gain then do your research. If the city is your choice, then perhaps evaluate in Brisbane or SE QLD. Don't be stuck in an area if other factors are telling you to look elsewhere.

Where to invest is a major subject in itself.



As always, there are a number of ways to look at this issue.

We could simplify it by saying that NG is bad; or, it is good. And we can all come up with excellent arguments to prove our theory and we'd be right - either way.

The sad truth is that is NG is a tool for people to use that in many cases allows them to buy an investment property that they would never have bought otherwise. It gets them into the game, so to speak.

A large number of the regular posters here are quite learned, and sophistictaed with their IP knowledge and so they know of other strategies and techniques and theories.

For most people though, they are not aware of these things. They cannot save money sufficient to buy a property because (especially at the moment) the growth of housing prices strips their ability, and capacity, to save. A NG technique allows them to get their feet wet and grow wealthy, even if they do have to contribute to the overall cost of keeping that property.

Let's face it, you could save $500, $1,000, $2,000 or even $5,000 each year and by placing that money into a bank account you might currently get 4% to 5% interest. Then, of course, the tax office will take between 1/3rd and 1/2 of that again. You will not save enough to grow wealthy!

However, that same $500, $1,000 etc being ploughed into a good property will produce far greater wealth over time and if the tax office actually assist in the process by providing a tax refund then that is a bonus.

It is important to buy good properties - after that NG or PG is merely a technique just as wraps, flips, and everything else is.

I have said this before, I have seen people who are poor and who have done nothing but lament missed opportunities. I have also seen people who have used both strategies to produce good wealth for themselves and their families.

Have fun

This negative v/ positive gearing debate is a little like IBM v/ Mac...

They are just different religeons... ;)

If you would have asked me years ago whether I would have recommended negative or positive gearing, My standard answer would have been:
"Why would you pay someone to live in your house?"

A little limited in view, and shows a distinct lack of understanding of the issues involved...

As Dale said, -G is just a tool. It is RIGHT... for some people.

Conversely, +G is also a tool, which is RIGHT... for some people...

Ruk said:
.. This is great, IF -G is within your risk and structural parameters.

What I mean by this is that I firmly believe that investment should be a structured thing, almost like an architecht plan of a building (although not quite so rigid!!). Plan from the start what you want to achieve, and how you are going to do it...

Of course this may change, but remember the old adage, those who fail to plan, plan to fail. At least with a plan you will know where you are going.

What I mean by risk parameters, is that there is an inherent risk in -G... That being the risk of loss of income. How can you pay even $500 per year (or multiples thereof) if you have no income.

I usually suggest to ppl who are considering -G to think about the permanency of their employment, or the reserve funding they have available in the event of loss of employment.

There is nothing worse than having to sell your -G because you have lost your job. Trust me, I did it back in late '80's with my 1st IP. Interest rate went to 19.5, I lost my job, and my (then) fiance's CSIRO appointment was not extended beyond it's original tenure. We just couldn't keep up the additional payments, so we had to sell. Cost lots, learned lots. :)

Negative gearing is really worthwhile, FOR SOME PEOPLE!!!

It is a pity, it would be nice to have a universally correct answer... We are all striving for that...

I guess we can only try to find the individually correct answer.

just my ramblings...

asy :D
In Ruk's case, in a year or two, if he can raise the rent just $10 to $15 a week he has a positive property. With low inflation it may take 3 years but if he is in an area of increasing population he should get it OK.
A good property at the right price is worth extending yourself for, property is always going to be a long term thing.
At times rent returns are lower than normal, but I believe rent returns are tied with interest rates, so low rates = low rent returns.
If/when interest rates rise, less people can buy so more people will rent and demand increases and we can all raise our rents !!!!!!

Dale is absolutely correct in my case. I could never have started as strongly as I did without negative gearing and the good old 221D. The growth I received from those properties has enable me to expand the portfolio, and it's all positive cash flow at present.

Asy I'm sorry to hear about your start, I am pleased to see that you had the courage to continue and didn't give up. I think if rates went back to 18% there would be a lot of people who are currently thinking they are positively geared who would need to reassess.

However it all seems pretty clear to me. I favour property for investment, I search for the type of property that suits me and my situation. Now if I'm in a period of low interest rates and fair rental returns as we are at the moment, then I'm positively geared and I do like that. If those rates increase dramatically or rents continue to decrease then I am negatively geared.

Either way, I am a buy and hold, long term investor. (Thank's Jan)
The economic cycles will naturally vary property values, rents and interest rates. I accept that and just get on with it, it seems we are a little too concerned about today and not looking to the future.


please post the cost of a house in your area and the rent you are able to charge for that house and i'll work it out to see if will work.

need an amount of personal income as well - does not have to be exact or real.
G'day Ruk,

I'm on the Northern Beaches, Sydney.
I received, the other day, a leaflet on buying brand new 4 bedroom houses in Warriewood Valley priced from $755,000.
These houses are two story on virtually no land. Small blocks to
say the least.
To receive a return of 5.5% (absolute minimum exceptable return)
your rent would have to be $800.00 a week.
My earnings gross, annually is $75,000. This doesn't include rent
returns.The $75,000 is real.

Bruce G.
g' day bruce,

a 755,000 i.p. would cost you 18,800/a. out of pocket.

you would be better off looking in another town or city.

755,000 in one residential i.p. would scare the shyt out of me.
Originally posted by Flex

Asy I'm sorry to hear about your start, I am pleased to see that you had the courage to continue and didn't give up.

Thanks Flex!
I have just gone through investing disaster #2, they say it's 3rd time lucky, don't they? hehehe

I think if rates went back to 18% there would be a lot of people who are currently thinking they are positively geared who would need to reassess.

I agree with you totally.

This is why I am always talking about investing with a thought to risk management, and risk profiles.

There is a 'risk' in any method of investing, it just means we have to look at what's acceptable and what's likely.

I have seen ppl say that their newly bought property is returning say 7% at current rates that's fine, it's +G, or =G.

If rates went to even as much as 10% some of these ppl would be in trouble... Never mind the 18% we saw in the '80's.

I have been predicting a glut of relatively new properties coming on the market soon (in about 18 months) due to the FHOG kiddies. Will be interesting to see what happens with these.

My reasoning here is that I saw numerous 'kids' (sorry to all the young ppl on the forum, at least by being here you show maturity, these ppl didn't... therefore I call them kids) going out and buying blocks of land to build on.

The home building companies (a-la jennings, henley, etc..) were offerring "NO deposit, 105% finance, Keep your FHOG" for quite a while. This was when I was selling land. I remember one young couple who took up this offer. The house and land came to $215k. He was a mechanic (fully qualified, and permanently employed, but not much hope of more pay, $31k at the time) and she was a trainee dental nurse (from memory about $24k). He was 23 and she was 19.

They were planning to co-incide their wedding with their home's completion, and their parents were right behind them.

They plan a family... soon... That brings them down to one income...

What really scares me is that this is not an isolated case...

I saw M-A-N-Y of them.

The other scary thing is that the fact that they were getting to KEEP the FHOG was seen as a bonus to many of them, and they were going out and buying doodads with it... Big screen telly, lounge suite and furniture, and in some cases a 2nd car. (Although I have to say, the couple above did intend to pay it into the mortgage).

When these couples fall back to one income, and an additional mouth (or two) to feed, and the interest rates go up, this spells DISASTER...

For them, not for investors, who will go in and mop these up for a song.

What are your thoughts on this?

asy :D
Even $300K in one IP scares the "shyt" out of me.

I agree with ady about -G being about acceptable risk. Holding an IP for $548/year is acceptable risk. Even a couple of $K per year.

Buying at or below market value is perhaps even more important in these situations because if you ever _do_ have to sell, the next thing you don't want to learn is that you paid too much and you are not going to recoup your investment...
G'day kevmeister,

You say borrowing $755k or even $300k would scare the shyt
out of you. Then that leaves nothing for Sydney investments.
Melbourne would be out of your limits too.
So now we look around else where. Newcastle prices have gone through the roof. Wollongong's unemployment is at 10%, very
brave investing there.
Maybe Lismore. Lismore floods so you need to be exstremely careful there.
Perhaps Perth. Rental vacancies are at an all time high, 5.3%.
Adelaide property prices have peeked. You'll be waiting another
ten years for the next cycle.
Brisbane is about it! As near the coast as possible.
I can't say much there, as I'm doing a little bit of research into those areas. Plus the lower areas of the Sunshine Coast.
Maybe you can give "us" some ideas.

Bruce G.

Have the courage to take your own advice.

Winners make it happen.
Losers let it happen.